The most common cause of business failure is “failure to launch” … a business that just never gains traction and doesn’t work out. The second most common is success.

Yes… success!

Growth EATS cash. You must constantly re-invest in the business to support the growth in sales. This takes a good business plan, a well thought out cash flow projection, and a comprehensive financing plan.

It also takes something that I see far too infrequently: fiscal discipline. It’s natural and normal, when a business starts to finally grow, to want to let up on the purse strings a little. Up until this point, most entrepreneurs are very, very careful with their cash. But once the money starts flowing a little faster, it’s easy to start spending it faster, too. However, it’s not time to do that yet.

This is the time to double up on your financial management and fiscal discipline — you’re going to need every penny for the next part of your journey.

In the growth years of your business, the game is all about cash flow and profitability. Here are a few tips on managing both.

Cash Flow:

Keep your bank accounts at an institution that likes to lend to businesses like yours, and cultivate a relationship with the commercial banker. A locally owned community bank is a great place to get started. Many businesses have been saved by a line of credit to fund inventory or receivables. If you already have a banker who knows you, your chances of getting that money are a lot better.

If you don’t have a background in finance and accounting, hire someone who does, or make certain that you have an excellent consultant.

Use a rolling six-month cash flow projection to manage your cash flow and consult it on a daily basis. It’s a lot of work and takes constant adjusting, but it’s well worth the investment of time. You will see clearly what is happening to your cash. For example, if customers are paying you more slowly than you had anticipated, it will show up right away when you compare your cash to your projections. You will also know well in advance when you will require outside cash, whether from a loan or outside investors. You will be able to show your lender or investor exactly where their money will be used, and how soon you’ll be able to pay it back or pay a return on the investment. When you wait until the last minute to go out looking for money to grow your company, it’s very difficult to get it.

Take advantage of installment payment plans wherever possible on things like insurance. Why tie up your cash by paying for the entire year in advance? This is a fairly cheap source of cash.

Profitability:

It’s critical to generate as much profit and cash as possible from internal sources. This means that you must proactively manage the profitability of your company.

Every dollar you save is another dollar you don’t need to borrow or raise. This is where fiscal discipline and financial management comes in.

Do your best to keep overheads as low as possible. If your business can’t be run out of your house, and is not a retail or location dependent business, choose the least expensive location you can, and continue your frugal “startup” ways with your office expenses.

Have a budget for overhead, marketing, and other non-product costs, and stick to it. Compare your actual spending to your budget every month and cut back if necessary.

As you grow, it’s nice to keep your expenses variable, so that you can ramp up without having to make big increases in spending. For example, instead of setting up your own warehouse, you could use a fulfillment warehouse, who will bill you by the transaction, to do your shipping and receiving until your volumes are big enough to justify the expense of setting up your own warehouse.

Another way to use this same “variable expense” concept is by hiring part time people instead of full time. When you need a bit more help, they can work extra hours without going to overtime, and you always have trained help available. This is much more profitable than hiring full time people before you have full time jobs for them.

We may soon start seeing inflation again, and many small business people are not used to this. You’ll want to watch your costs closely, and if necessary, raise prices a small amount at a time, rather than having to go back to your customers for a large price increase after your profitability goes down.

All of these steps require reliable financial information on a timely basis. Don’t skimp on accounting and financial management – you need to know where you are, and how you got there, in order to get through this stage of your business journey. Navigate it wisely and frugally, and you’ll end up with the business you dreamed of.

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